Castleberry v. Branscum

In Castleberry v. Branscum, 721 S.W.2d 270, 271 (Tex. 1986), a corporation called Texan Transfer was formed by Castleberry, Branscum, and Byboth for the purpose of operating a furniture moving business. Castleberry, 721 S.W.2d at 274. Each individual owned one third of Texan Transfer's shares. Id. Soon thereafter, Branscum formed a competing business called Elite Moving. Id. Castleberry and Branscum had a falling out over the creation of Elite Moving, and Castleberry sold his stock back to Texan Transfer in exchange for a promissory note. Id. After making one payment on the note, Texan Transfer defaulted on the remaining balance. Id. On at least three occasions, Branscum told others that he would deplete Texan Transfer of its assets to ensure that Castleberry was not paid on the promissory note. Id. at 274-75. After the buy-out, Elite Moving took more and more of Texan Transfer's business. Id. at 274. The two companies operated out of the same location, and Texan Transfer allowed Elite Moving to use its trucks despite the lack of a written rental agreement or other records to show how much Elite Moving owed for such usage. Id. After Castleberry filed suit, Branscum and Byboth formed a third corporation which also operated out of the same location, they terminated a major contract that Texan Transfer had with a furniture company, and then they obtained for the third corporation the same contract. Id. at 274-75. The jury found that Branscum and his co-owner had used Texan Transfer as a sham to perpetrate a fraud on Castleberry, and the trial court rendered judgment that Branscum and Byboth were personally liable for the promissory note. Id. at 271. The Supreme Court of Texas held that constructive fraud, not just actual fraud, was adequate to disregard the corporate fiction. See id. at 272-73. The Court explained the difference between the two types of fraud as follows: "Actual fraud usually involves dishonesty of purpose or intent to deceive, whereas constructive fraud is the breach of some legal or equitable duty which, irrespective of moral guilt, the law declares fraudulent because of its tendency to deceive others, to violate confidence, or to injure public interests." Id. at 273. Turning to the evidence, the Court stated: "We hold that this is some evidence of a sham to perpetrate a fraud. A jury could find that Byboth and Branscum manipulated a closely-held corporation, Texan Transfer, and formed competing businesses to ensure that Castleberry did not get paid. Castleberry had little choice but to sell his shares back to the corporation. While this evidence may be no evidence of intentional fraud, constructive fraud, not intentional fraud, is the standard for disregarding the corporate fiction on the basis of a sham to perpetrate a fraud." Id. at 275. Thus, although the Castleberry Court questioned whether "intentional fraud" had been established, it affirmed the trial court's judgment on the basis of constructive fraud. Id. at 277. The Texas Supreme Court recognized several situations in which Texas courts will disregard the corporate fiction: (1) when the fiction is used as a means of perpetrating fraud; (2) where a corporation is organized and operated as a mere tool or business conduit of another corporation; (3) where the corporation fiction is resorted to as a means of evading an existing legal obligation; (4) where the corporate fiction is employed to achieve or perpetuate monopoly; (5) where the corporate fiction is used to circumvent a statute; (6) where the corporate fiction is relied upon as a protection of crime or to justify wrong. Id. at 272. In a footnote, Castleberry goes on to state: "Inadequate capitalization is another basis for disregarding the corporate fiction." Id. at 272 n.3.